As we get older we tend to think more about our legacy. No matter your age or state of health, you should already have a will in place that specifies who will receive your assets on your death.
Unfortunately, things are not always so simple. Good estate planning is about much more than just having a valid will, especially for expatriates. Not only are there tax and succession rules of two or more countries to consider, many people now have more complex family structures to cater for.
To maximise your legacy, you will want to pass it on to your chosen heirs in the most tax-efficient way possible. But you can also take steps to make sure it is gifted at the right time, stays in the right hands and is used wisely after you are gone.
Why gift with control?
There are many common situations where you would want to retain some control over your legacy after death.
You may want to leave money to your children but worry how they will handle it at this stage in their life. Perhaps they cannot be trusted with a large amount or you have concerns about whether their marriage will last. In this case, you might prefer to leave a flexible income rather than a lump sum so it cannot be spent all at once.
Or maybe you would like to delay their inheritance until they reach a certain age; for example, to ensure they have a comfortable retirement and do not have to worry about medical costs in later life.
You could want your grandchildren to receive your gift when they reach a more financially mature age, or earmark it for a particular purpose, like university fees. You might like them to have access to a certain amount of capital while studying, then receive the rest around the time they would look to buy their first property.
In cases where marriages have broken up or estranged family members have legal guardianship of your heirs, you may want to protect their inheritance and defer access until they can inherit as adults at 18.
Whatever the reasons for wanting control and certainty, you need careful planning with tailor-made solutions for your goals and particular family circumstances.
Traditionally, gifting with control often involved the use of a trust structure. While this approach can still offer advantages, the tax-efficient benefits in Portugal have diminished in recent years, and may do so further once the UK leaves the EU with Brexit.
There are alternative ways of structuring your capital that enable you to meet your estate planning objectives while also providing tax benefits, not only for your heirs, but for you within your lifetime. Ideally, you would receive tax-efficient income and investment growth throughout retirement, combined with certainty of succession without the need for probate.
Even if you have been living in Portugal for many years, you could remain UK-domiciled and liable for 40% UK inheritance taxes on your worldwide assets. While the Portuguese equivalent will not apply to your spouse or descendants, other heirs – including stepchildren – could be liable for 10% stamp duty on Portuguese assets, wherever they are resident.
Portuguese residents are also affected by ‘forced heirship’. This does not affect taxation, but automatically allocates a fixed proportion of your worldwide estate (excluding non-Portuguese real estate) to your spouse and direct family on death. You can override this by nominating in your will for the law of your nationality to apply (the ‘Brussels IV’ EU regulation), but beware that this could have unwelcome tax implications.
Cross-border estate planning
While a good estate plan should focus on ensuring your wishes are carried out without attracting unnecessary taxation, you must take account of relevant legal and tax considerations. It is crucial you use robust arrangements which are compliant in Portugal, the UK, and anywhere else you may have assets or heirs.
Cross-border tax and estate planning is highly complex and it is easy to get things wrong, with potentially serious consequences. With the automatic exchange of financial information now in place, it is more important than ever to ensure your arrangements stand up to scrutiny by the tax authorities.
Your estate plan also needs to be flexible enough to accommodate events like more grandchildren, divorce or re-marriage within the family. It is vital to review your planning regularly, so if you set up your arrangements years ago, take time to look at it again.
Estate planning is a specialist area and each family is different, so take professional advice to ensure the right money passes to the right hands at the right time, while minimising taxes during your lifetime and beyond.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
By Dan Henderson
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Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.